In the traditional business world inventory is an asset. It shows up on financial statements as an asset. Therefore having plenty of inventory was good for the financial statement. But is it good for the company? A more modern view of inventory is to look at it as a means to an end. To have shipments to customers you need finished goods inventory. To have finished goods inventory you need work in process. To have production make products you need raw materials inventory.
The measurement of inventory turns came in to use with the advent of Constraints Management, Lean Principles and Just In Time philosophy. The view of inventory from these theories added the dimension of time to the definition of inventory. The faster you converted raw materials into shipments, the shorter your cash flow cycle and the lower your costs. To measure the flow of materials (inventory) through the production process, the concept of Inventory Turns was devised.
Inventory Turns is computed (from the APICS Dictionary) by dividing the average (annual) inventory level into the annual cost of sales. Typically, the higher the inventory turns, the faster you are converting materials into shipments. Although inventory turns are often measured on an annual basis, you can take this measurement for any time period. Accountants should be able to give you these numbers without difficulty.
What is a good level of inventory turns? One gauge is to compare your company to similar companies. The data for this comparison can be found in financial statements. This comparison will offer clues help you direct your energies to be more competitive.
But even if you don’t compare your operations to your competition, the calculation of inventory turns will provide valuable insight into your performance. In many production lines, inventory is used to reduce downtime caused by a variety of factors such as machine breakdowns, delays in sub-assemblies or parts coming from other departments or vendors, and quality problems. Inventory is simply used to mask problems not to solve them. You need to address the problem and not hide it under a pile of inventory.
When you develop a Value Stream Map of a process flow (Lean Technique) it will provide you with inventory information. This information an easily allow you to determine the inventory turns for the process flow stream. VSM will show you where the inventory is piled up and needs to move faster. You may want to take action to shorten lead times, reduce lot sizes, change vendors, or remove factors that cause variability in the process output. By measuring inventory turns for the process flow before, and after, your improvements; you will have a clear measure of the success of your improvement efforts.
When you measure inventory turns you can look at the overall plant level picture for senior management. For process or production line managers you can look at the inventory turns in your process or department. Look at all levels of inventory for their turns: raw material, work in process and finished goods. When you get this data it will raise questions in your mind: Why are my turns this low? What can we do to increase our inventory turns?
We have been discussing inventory turns in the context of a manufacturing process. How about its application to an engineering department or purchasing department? There are inventories in these areas, and measuring them and their turns will yield valuable information on performance and problems in these areas.
Inventory Turns are a powerful gauge of the performance of a company, department or process. It is relatively easy to gather the data, and the measurement offers clues to improvement actions.
When was the last time you looked at your inventory turns?
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